Control-Enhancing Mechanisms and Earnings Management: Empirical Evidence from Pakistan

Abstract

Separation of ownership and control plays a significant role in determining the agency cost, and there are many consequences of this agency problem. The control-enhancing mechanisms enhance control of controlling shareholders who expropriate small shareholders. Controlling shareholders are different in different countries; majorly, family firms are controlling firms in Pakistani context. The use of control-enhancing mechanism is rampant in emerging economies, and even some developed countries, related research especially in Pakistan requires evidence. This study exhibits a pooled cross-sectional analysis of listed companies in Pakistan between 2005 and 2016. In this research, we have examined the influence of control-enhancing mechanisms on firms’ earnings management and which mechanism (pyramid control, multiple control chains, and cross-holding control) is significantly influencing the earnings management of firms. We have analyzed both types of earnings manipulation techniques (accrual and real earning management). Our results explicate that the pyramid control and multiple control chain mechanisms are significantly positively related to the accruals earning management and real earnings management, unveiling that firms with these controls manipulate earnings with discretionary accruals as well as with real activity manipulation. Real activity manipulation enhances firms to overproduce the inventory (decreasing the unit price) and to reduce the discretionary expenses (increasing the reported earnings).

Moderating Influence of Audit Quality on the Relationship Between Concentrated Ownership and Accounting Conservatism: In Pakistani Listed Firms: Empirical Evidence From GMM Technique

“…Fomento, (1999) point out different characteristics of Asian economies such as poor judicial settings, widespread prevalence of corruption and poor investors' and property rights, which helps in the exploitation of weaker parties by influential ones. Furthermore, Pakistan, like many developing countries, has highly concentrated ownership where the majority of stocks lie within one or more significant shareholders, usually family members, foreign and state (Shaikh et al, 2019).…”

“…The motivation of this study derived from the highly concentrated and distinctive ownership structure prevailing in Pakistani listed firms (Shaikh, Fei, Shaique, & Nazir, 2019), and impact of this highly concentrated ownership structures on the way financial reports are prepared and presented. Since, agency conflict between majority and minority shareholders is highly prevalent in Pakistani listed companies (Khan & Nouman, 2017), and Pakistani firms' extensively engage in earnings management practices, (Shaikh et al, 2019), therefore, this study also intends to find out if application of conservatism principles could reduce the moral hazard problems resulting from agency conflict, (Mora & Walker, 2015).…”

“…Lafond & Roychowdhury (2008) explained in their findings that higher agency conflict occurs due to the lower managerial ownership, which leads to more significant information asymmetry and higher demand for conservatism by shareholders. However, the study by Lafond & Roychowdhury, (2008) was based on U.S data while Pakistan has highly concentrated ownership (Shaikh et al, 2019) like many other Asian countries, in contrast with dispersed ownership structures commonly found in the USA and other Anglo-American countries.…”

“…We extended Lafond & Roychowdhury, (2008) study by focusing on concentrated ownership in Pakistani listed companies, where concentrated ownership lies mainly within a family, foreign investor or with the state (Shaikh et al 2019). Therefore, we have divided concentrated ownership into these three categories and investigated their effect on conservatism in financial reporting.…”

Is there any association between real earnings management and crash risk of stock price during uncertainty? An evidence from family-owned firms in an emerging economy

“…A research work by Zaidi et al [55] discloses that eighty percent of companies registered on PSX are directly or indirectly family-owned businesses. An ample of research literature is available related to family-owned business highlighting various aspects of family-owned firms, for instance, the structure of ownership or financial distress among family-owned firms [52], EM and concentration of ownership among family firms [8], financial outcome and tunneling of a group-owned businesses [4,31]. However.…”